How Many Crosses Will It Take to Say Goodbye to Dow 10,000 Forever?
History offers us some clues.
We can always try to find Mr. Owl to ask him how many moving average crosses it takes for a “never look back” bull market to take hold, but we can probably find the answers a bit more easily in the charts.
A Check-In on an Old Study…
Back in 2009 - 2010, when I was doing some joint research and writing with my good friend, David Weigman (he and I used to run ThirdWave Markets, Inc.), we put out a research piece on the time it has historically taken for the market (as defined by the Dow Jones Industrial Average (INDEXDJX:.DJI) for comparison purposes) to take off and leave technical levels of prominence behind following historic market peaks and the subsequent bear markets.
At the time, we put forth that “technical levels of prominence” for the Dow around the previous historic bear markets were 100, 1,000 and 10,000. The 100 level was first eclipsed in mid-1920s and ran all the way up to nearly 400 before the 1929 crash. The 1,000 level was first eclipsed in 1973 but failed to even make it to 1,000 on that first breakout. The 10,000 level was first eclipsed in 1999 and almost made it to 12,000 before giving way to the bear market in 2000 - 2003.
The point of our research then (and now) was to find out if there were any patterns that could be uncovered that could tell us when it was “safe” to get back in the water for the long-term. In other words, how much time and how many short- to intermediate-term market swings did investors have to endure before they could get long of the broader stock market with great confidence for the long-term?
The technical tools we used for this research were the 200-day and 400-day moving averages. We found that following a historic peak after a break of the key technical barrier, the corrective / base building process would only conclude after three crosses of the 200-day moving average above the 400-day moving average. To more easily demonstrate these three time periods studied below, I’m utilizing the 12-month and 24-month moving averages instead of the 200-day and 400-day moving averages.
The first chart below shows the 1924 -1944 time period, which encompassed the first break of 100 on the upside, the run to a peak in 1929, the initial crash scenario, and then the long recovery phase. Notice that once the market bottomed in 1932, a nice rally ensued where profits were there for the taking. The Dow did run all the way up to nearly 200 in 1937 from the bottom below 50 in 1929 (forcing the 12-month moving average above the 24-month moving average for the first time). However, that was clearly not the end of the macro consolidative process. Another bear market ensued in 1937 and was followed by another 4.5 years of neutral to lower action (where we saw the second 12 over 24 crossover and subsequent give-back). Finally, we saw the Dow bottom out (back below 100 again) in 1942 and start to rally, forcing the key third “12 over 24” crossover to occur. The 1942 bottom was the last time the Dow ever saw 100.
Click to enlarge
This was merely one sequence, though. Could we draw conclusions about this 200 over 400 (or 12 over 24) 3-count for future reference? Let’s take a look at the miserable bear market of the mid- to late-1970s.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.